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Yesterday, Elisabeth, Anthony and I walked the streets of Rome, the little village of seven hills founded in 753 B.C. that rose to rule the world from the Persian Gulf to the Atlantic coast.
At its height, Rome dominated 120 million citizens and subjects, nearly half the world’s entire population.
Its land area stretched across 2.5 million square miles, more than the total of all West and East European countries today (with the exception of Russia’s).
What caused its demise?
For the answer, Edward Gibbon’s Decline and Fall of the Roman Empire has long been the bible of historians. Gibbon attributed Rome’s decline to the gradual weakening of its military — the outsourcing of its defense to questionable foreign mercenaries and the dilution of Roman martial virtues with the advent of Christianity.
But in recent years, historians, sociologists and economists have begun to recognize a series of closely linked economic factors that played a larger role in the empire’s decline than previously believed. And today in Rome, I saw some of the evidence ...
First, everywhere we went, we saw the remnants of massive — and often excessive — government spending.
The Roman Forum, the Arch of Titus and many more were built out of pure marble and probably cost the Ancient Roman Empire the equivalent of hundreds of billions in the context of today’s economy.
The Pantheon, a great circular temple located near Piazza Navona, could easily have cost billions more. It’s one of the few that still stands almost exactly as it was built nearly 1,900 years ago.
The massive Castel Sant’Angelo, on the banks of the Tiber at the other end of the Via della Conciliazione from St. Peter’s basilica, was built by the Emperor Hadrian as a mausoleum for himself and his successors — another huge drain on Rome’s coffers.
Rome’s networks of roads, aqueducts and public baths were also not cheap.
A clear pattern that we noticed today: The most magnificent structures were built in the early years of the Empire, between 50 B.C. and 200 A.D. But in the third and fourth centuries, the big civic building projects dropped off rapidly as Rome was forced to spend more on its military and social services.
One major exception: The vast Aurelian walls that snake their way through modern-day Rome, built in 270 A.D. But unlike the structures of earlier years, these were strictly military fortifications — not temples or public buildings.
Rome’s coffers were further drained by the cost of its vast standing army of 500,000.
Nor was it cheap to keep the restless populace happy and distracted. Rome paid a fortune for its network of great games and spectacles — the equivalent of $100 million per year, according to historians, which, in proportion to their resources, would be the equivalent of thousands of times more today.
Plus, Rome dug itself into a financial hole with huge pension liabilities owed to a growing mass of retired soldiers and bureaucrats.
Second, much like the U.S. today, Rome was drained by threats from the Persian Gulf.
Most people think the primary attacks against Rome came from the north — frequent battles with Germanic tribes such as the Ostrogoths and the Visigoths, which for centuries harassed the Roman Empire ... plus even bloodier conflicts with the Huns, stampeding from Eurasia.
But now, recent studies are shifting much of the blame to the east — especially Persia (now Iran), which Rome fought for more than 600 years.
First Rome battled the Parthian Empire, which included all of today’s Iran and Iraq.
Then, Rome battled the even larger Sassanid Persian Empire (A.D. 226 - 651), encompassing not only today’s Iran and Iraq, but also Kuwait, Saudi Arabia, all of the Persian Gulf states, Afghanistan, Pakistan, Syria, Lebanon and others.
Three of the biggest names among Roman leaders — Pompey, Mark Anthony, Trajan — became enmeshed in battles against the Persians. Many others suffered similar losses.
Indeed, historian Peter Heather, in his recently published The Fall of the Roman Empire, suggests that it was Rome’s long entanglement with the Persian Gulf and Mid-East empires that largely sealed its fate.
And it was primarily the colossal spending to meet the growing Persian threat that forced the Roman government to seek new sources of revenues, which leads me to ...
The third factor that drove Rome into ruin: Excessive taxation!
In the early days of the Empire, the tax burden to Romans was minimal: Citizens paid a sales tax, but it was capped at only 1%. Land taxes were limited to 10% to 20% of the land’s yield. Inheritance taxes were only 5%. Import duties and tariffs were inconsequential. And there was a tiny per-person head tax, based on a regular census.
In this low-tax environment, the economy prospered. But as the costs of maintaining the Imperial army grew, so did the tax burden.
Rome began to levy special income taxes and fees — like the primipili pastus, an obligation of local landowners to supply all rations necessary for a garrison ... or the follis, a tax on senatorial estates.
The taxes became so onerous that heirs routinely declined large inheritances because they couldn’t afford to pay the taxes required. Middle-class Romans went bankrupt. Upper-class Romans soon joined them.
Tax revenues plunged. Rome was strapped for cash. And it could no longer pay its professional soldiers — mostly Germanic tribal mercenaries — to guard its northern borders. Another pillar of the empire was crumbling.
The fourth and most fatal blow to Rome: Inflation.
When the Roman government needed more funding and had difficulty raising more tax revenue, it did what nearly all governments have done before and since: It manufactured more money and debased its currency.
The silver content of the most common coin, the denarius, was a hefty 90% in the age of Nero (54 - 68 A.D.). Two centuries later, by the reign of Claudius II (268 - 270 A.D.), it was down to a meager 0.2%.
The value of silver surged and inflation raged.
One historian estimates that the cost of a measure of Egyptian wheat rose from seven to eight drachmas in the second century to 120,000 in the third century — an inflation of 15,000 percent.
The combination of these factors — not just the Goths and the Huns — was the true cause of Rome’s collapse.
Let this be fair warning to all governments, especially our own, regarding the grave perils of overspending and overbuilding ... overtaxing its people while squandering their wealth ... overextending the military and ... overinflating the economy while debasing the currency.
If each of these blunderous policies were being scrupulously avoided in America today, we might be able to breathe a sigh relief. But, alas, nothing could be further from the truth. The facts:
Meanwhile, here in Europe, the value of the U.S. dollar continues to sink. The dollar bought 1.21 euros at its peak in 2000. Today, it buys only 0.79 cents.
First, don’t assume the American Century will last for 100 years. Already, a relatively small, backward country like Iran is in a position to thumb its nose at the United States. Already, a non-democratic nation — China — has emerged as the new locomotive of the world economy, accumulating foreign reserves that are far larger than ours were at their peak.
Second, don’t assume our government can continue to overtax, overspend and overinflate without severe consequences for U.S. investors, including vast losses of wealth.
Third, take protective action. We don’t know for sure that the decline in America’s economic, financial and military power will continue. We pray that it won’t. But we do know with certainty that you need to protect yourself from that risk.
That means keeping a substantial chunk of your net worth in the safest and most liquid investments you can find — such as U.S. Treasury bills or a Treasury-only money fund.
Our favorites include:
It also means allocating a portion of your portfolio to investments that are likely to go up when the dollar declines — such as gold, energy and other natural resources.
Fourth, shift some money to areas enjoying a renaissance of economic progress and growth.
Two weeks from today, we’ll be in Venice, where the Renaissance began and today’s modern capitalism was born. I’ll tell you more about it then.
Good luck and God bless!
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